Budget changes leave households £511 a year worse off as tax credit cuts undermine Government claim

Families will be £511 a year worse off on average from tomorrow because of swingeing cuts to tax credits in the Budget.

Up to one million households will lose their child tax credit or working tax credits when the austerity measures come into force on Friday.

Families with children will see their take-home pay slashed because of reforms to the tax and benefits system.

From Friday, up to one million households will lose their child tax credit or working tax credits when the austerity measures come into force

In addition, pensioners will be an average of £315 a year worse off from April 2014 once the 'granny tax' – the freezing of their personal tax allowances – kicks in.

The figures were produced by the Institute of Fiscal Studies following a request by Labour and prompted a huge row last night as the Treasury has insisted that 24million households will be better off by £6.50 a week.

But the IFS analysis of the Budget said that families with children would on average be left out of pocket.

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Some 850,000 households on modest or middle incomes will lose all their child tax credit, worth around £545 a year.

Although people can now earn more before they are taxed, thanks to the raising of personal allowances, the cumulative effect will leave many households with children worse off, the IFS said.

From tomorrow, child tax credits will be removed from any family with one child who earn more than £26,000 – down from the current £40,000 level.

Chancellor George Osborne (left) was accused of giving with one hand while taking with the other by Labour leader Ed Miliband (right)

A couple will now also have to work at least 24 hours a week, up from 16 hours for a single person, to qualify for a working tax credit.

It means up to 212,000 working couples earning less than around £17,000 a year will lose close to £4,000 – all their Working Tax Credit – if they cannot increase their hours at work. A couple with two children on the minimum wage could be better off quitting their jobs and going on benefits if they cannot work at least 19 hours per week.

The move undermines the Government's pledge to ensure all families are better off in work than on benefits. And the impact of the tax credits bombshell does not take into account last year's VAT hike, which costs the average family £450 a year.

The earnings threshold before someone has to pay tax was raised by £1,100 in the Budget to £9,205.

But, on average, families will be £1,335 a year worse off if all the Coalition's measures since 2010 are taken into account.

Shadow Chancellor Ed Balls said the Government was giving with one hand while taking with the other. He added: 'Despite promises to make work pay, thousands of working parents will now find themselves better off if they quit their jobs.'

A Treasury spokesman said: 'Even taking into account changes to tax credits, the average household will be £5.50 a week better off in cash terms – with more than 15 times as many gaining than losing.

He added: 'Ultimately, there is nothing fair about running huge budget deficits and burdening future generations with debts we cannot afford to pay. If the deficit is not tackled now, the impact on families will be worse in the long term with less money to deliver the public services that they rely on.'

A Government source said that it was 'not unreasonable to ask a couple to work 26 hours a week' for their working tax credit, compared to 16 hours for a single person.

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Budget changes leave households £511 a year worse off as tax credit cuts undermine Government claim